Investor Psychology Continues To Puzzle Me


By: Guest Authors

By: Brooks A. Mick

The following is an analogy. That’s clarification for those who take things literally.

There are two ladies’ clothing stores on opposite sides of the same street corner.

On Monday, one has a sign which says “5% off.” The other has a sign which says “5% markup.” Both appear to have about the same number of customers going in and out.

On Tuesday, Store #1 says “10% off all items.” Store #2 says “10% markup on all items!” Interestingly, store #2 seems to have more customers.

On Wednesday, Store #1′s sign says “20% off all items.” Store #2 says “20% markup on all items!” More strangely, Store #2 has many more customers than Store#1.

On Thursday, Store #1′s sign says “50% off all items.” Store #2′s sign says “50% markup on all items!” Business is really booming at Store #2. Even more strange, people are buying the dresses and blouses and other items at Store #1 and running across the street to sell them at a huge loss to the owner of Store #1!

If you have not guessed by now, that’s how many people behave when buying and selling stocks. They go on a mad shopping spree when prices are high, and then they panic and sell when the market is low. This is exactly opposite what they should do, of course. They should buy in Store #1 and then sell the goods in Store #2.

Investor psychology continues to puzzle me.

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